Is it time to buy that offshore business? 29-07-2011

It is comparatively cheap to import things at the moment where the cost price is in US$, or Euro.

So a high NZD:USD exchange rate is good if you are ready to buy a business offshore in US dollars.

So for example if you want to buy a plant in Thailand for US$200,000 it would currently cost around NZ$235,000.  So if you borrow the NZ$235,000 and the exchange rate drops to US$0.65:NZ$1.00 you will have an asset worth NZ$307,000  and borrowings of $235,000.  Without any loan repayments equity of 22% has been created.

For the example to work in real life a few things need to be true:
- most importantly it must be a good deal;
- also important is ensuring your business is ready for the changes going offshore causes;
- the model only works if you buy in US$ using NZ$ at current or better exchange rates; and
- the US dollar returns to it historical levels (which it may not);

The risk around the currency can be managed by using currency contracts - options maybe worth considering.

Clearly there is a lot that has to be right. So do not rely on this blog to make your decision get proper advice.